For corporate participants in Australia’s FX markets, commodity markets continue to be a material driver of total volumes and trends in currency flows, says Cameron Peter, managing director of Peter Lee Associates (PLA). “Corporate volumes across the natural resources and the food, beverage and agribusiness sectors – the two key commodity/export-based sectors – generated 61% of all reported volumes in 2023. They also generated 95% of all of the growth in corporate volumes between 2020 and 2023. However, this growth trend plateaued between 2022 and 2023, as commodity prices levelled off. The major growth sector over 2023 (albeit relatively small in volume) has been airlines/tourism.”
Interestingly, the PLA research shows that the proportion of electronic trading of FX among corporate participants actually dropped in 2023, from 55% to 51%, its lowest level in four years. Peter puts this down to a reversion to pre-Covid behaviour as well as an historical high in swaps volumes.
Superannuation funds growth
When it comes to financial institutions, the increased assets under management (AuM) within the superannuation sector and the growing trend for these superannuation funds to insource FX management continue to be the primary drivers of increased volumes and will likely continue to drive volumes in the future, says Peter. “Total reported FX volumes of industry funds increased by 8% in 2023, exceeding one trillion for the first time. Against this, reported volumes of traditional real money funds was down last year,” he says.
In terms of the efforts of Australian FX providers to expand their portfolio of FX products and services, it has mostly been a case of continuing the work done in the previous year, says Peters. “Firstly, they focused on EM currencies and NDFs where there are steadily growing volumes. Secondly, they have looked at algo trading, where institutional users are expanding the panel of banks which serve as their access points to algo execution. There is also a steadily growing number corporates using algos,” says Peter.
“Demand for FX algo trading and electronic FX option trading continues to grow across the Australian buyside and investor community. Corporate demand has been driven mainly by large natural resources companies/commodity traders who tend to use more spot. The number of corporate algo users has increased from five in 2021 to eight in 2023 and of the eight corporates that use algos, seven are natural resources/commodity traders,” says Peter.
For financial institutions, increased demand has been driven by increased volumes, an increasing desire for best-execution and compliance/governance issues, says Peter. “Not only has the number of algo users continued to grow, but the percentage of their total volume executed through algos is at record levels.”
Options trading though has remained at a low level relative to other countries, says Peter. “We are not seeing Australian respondents using platforms for options trading at this point. Options represent only 6% of reported volume amongst corporates and 3% across financial institutions.”
New digital banking and payment platforms are also having an impact on the traditional FX market. “Australian banks are enhancing their transactional banking platform offerings, which are being increasingly taken up by large corporates,” says Peter.
“In 2023, 45% of large corporates are now using host-to-host platforms. In addition, 22% have implemented API functionality into their transaction banking, with a further 29% planning to implement in the future. This additional functionality allows greater integration of both proprietary and third-party FX platforms into day-to-day banking,” says Peter.
“Not only has the number of algo users continued to grow, but the percentage of their total volume executed through algos is at record levels.”
Cameron Peter
Should the e-FX market continue to grow across Australia, it could deliver further benefits for buy-side firms and investors over the next few years, says Peter. “Algo trading and TCA will continue to grow in Australia as respondents better realise the execution benefits, respond to requests by boards/executives for greater transparency and evidence of true competition in trading, and for improved MIS. For corporates, it is likely that also usage will continue to grow amongst corporates, as commodity prices stay strong and treasury staff in corporates become more comfortable with algo trading, and that the execution and pricing benefits of trading algos become more understood.”
More complex trading requirements
One of the reasons for the continually growing demand for FX algo and FX option trading across the Australian buyside and investor community is that these market participants are looking to broaden the tools they have available to them for FX execution, says Alex Cooke, head of FX, financial institutions Australia, at ANZ. “FX algo is a simple, flexible, and transparent way for participants to execute their FX requirements while meeting their best execution obligations. With the growth in the Australian investment industry through compulsory superannuation contributions we have seen the scale and complexity of trading requirements continue to develop. Products that have good connectivity through buy side order management systems and then sell side capabilities will continue to grow in use. At ANZ we continue to see growing demand for our extensive FX algo suite of products from the investment community,” says Cooke.
“As buy side firms and investors continue their exponential growth in Australia from the mandated compulsory superannuation contributions, we foresee further demand for execution solutions that can provide scale while meeting best execution obligations and minimising operational risk. eFX solutions, like ANZ’s FX algo products, meet all these requirements and help enable buy side firms to achieve execution efficiencies on a 24/5 basis,” adds Cooke.
“With the growth in the Australian investment industry through compulsory superannuation contributions we have seen the scale and complexity of trading requirements continue to develop.”
Alex Cooke
The commodity markets continue to influence currency flows and trading activity in the Australian FX market, says Paul Scott, head of eCapabilities and ePlatforms, markets, ANZ. “Australia is a major exporter of commodities, particularly minerals and agricultural products. Fluctuations in commodity prices, such as iron ore (due to impacts surrounding the urbanisation story within the Chinese economy) or fluctuations in gold (due to geopolitical activity and impacts on inflation) have significant influence on the value and volumes of the Australian dollar (AUD). Additionally, the AUD is considered a proxy for ‘risk on’ or ‘risk off’ sentiment and by default sees speculative trading activities, including carry trades and hedge fund positioning, contribute to short-term fluctuations in the AUD exchange rate.”
In line with the global trend, Australia has seen an increase in FX turnover due to higher volatility related to increasing geopolitical activity, shifting expectations for inflation and central bank policy setting, says Scott. “In Australia, most of this increase has come from short dated (<7 days) FX swaps and outrights given the aversion to taking risk over longer periods. This is often due to increased uncertainty and volatility. FX swaps rely more heavily on ‘Voice intermediation’ given trades involve large notional amounts, bespoke settlement arrangements and Australia’s greater concentration within the banking sector. Around 85% of the number of trades in Australia are executed electronically, however by volume this falls to 50%, which is below the global average of 60% electrification for FX swaps.”
“We have formulated a dedicated eFICC Data and Analytics team to create valuable insights from internal and external data..”
Paul Scott
Amid these various trends, leading Australian FX providers have been broadening their portfolio of FX products and services and launching more flexible and powerful electronic trading platforms, real-time pricing solutions, currency research services and pre and post-trade FX toolsets. “FX providers are constantly refactoring, rebuilding or in some cases re-designing key aspects of the software, hardware and architecture to ensure they maintain performance as well as product enhancements,” says Scott.
“Some of the key initiatives undertaken by ANZ to support the broader franchise include integrated liquidity and order management; pre and post trade client analytics; extensive FX Algo suite and provision of FX benchmark rates. We have formulated a dedicated eFICC Data and Analytics team to create valuable insights from internal and external data and help empower the sales team to engage with clients on relevant market trends and opportunities. Trade processes have been streamlined in order to drive down costs and ensure compliance with ongoing regulation changes.”
Technology developments
Many recent developments in FX offerings may appear nuanced but can have a significant benefit for buy-side firms, hedge funds and broker dealers alike. As is often the case, the devil is in the detail, says James Alexander, chief commercial officer at 26 Degrees Global Markets, an Australia-based prime of prime.
“One development that we see gaining momentum is an increased acceptance of vendor hosted technologies in the areas of core price generation and risk management capacities. In the past, many liquidity providers have relied on proprietary technology to perform both core components such as pricing and execution, and non-core components, such as dealer platforms and TCA, of their eFX workflows.”
“One development that we see gaining momentum is an increased acceptance of vendor hosted technologies in the areas of core price generation and risk management capacities.”
James Alexander
The cost of maintaining and optimising such systems has often proven challenging, says Alexander. “This is especially true as refresh rates for FX pricing increase across the street and quote loads on infrastructure and networks continue to rise as a result. This effect places an increasing onus on capacity planning and management. The result is that liquidity providers are looking at ways to partner more seamlessly with vendor technology’s that can deliver cost efficiencies without increasing operational risks,” says Alexander.
“Intermediaries such as the non-bank prime brokers and prime of prime providers, have a significant opportunity to leverage ever more powerful trading technologies to provide a highly customised client experience combining credit and liquidity solutions with a range of value-add services such as customised quote filtration, flexible order routing and algorithmic execution. When supported by low latency vendor technologies such solutions, can represent a simple yet highly effective alternative to traditional prime broker solutions,” says Alexander.
“The recent interest in trading in precious metals has seen a number of liquidity providers looking to offer an expanded range of precious metals such as gold, silver, platinum and palladium against a wider range of currencies in a bid to capture a slice of the significant increases in precious metals by within Australia and abroad,” says Alexander.
Retail FX in Australia
The retail FX market is also evolving in Australia, partly due to the work that ASIC has done to regulate the market, says Alexander at 26 Degrees Global Markets. “The regulator has been proactive in recent years in oversight and enforcement when it comes to retail traders, especially where leverage is involved. Product intervention orders have been enacted and additional enhancements to regulation introduced via the likes of design and distribution orders. Leverage restrictions, negative balance protection, standardisation of margin-close out rules are all but a few examples of the proactive approach being taken by the regulator,” says Alexander.
“Many of these regulatory enhancements emulate similar moves by regulators in other major jurisdictions and there are perhaps some insights that we can glean from the impact of these regulatory changes in other major developed jurisdictions. In the Japanese market, long considered one of the largest and most mature markets for retail trading, the introduction of leverage restrictions has an interesting effect,” says Alexander.
“Initially retail participation and notional volumes fell but then rose in the years following as retail traders turned to more automated / algorithmic trading strategies and systems. With advancements in trading interfaces and programable trading, we may well see a similar pattern evolve in Australia.”
